The Writer’s Coin

The other day it hit me that I haven’t written a post related to investing in a LONG time. Not good. Part of it probably has to do that I write about that stuff at work all day long, so I’m probably shying away from it here unconsciously. So today I want to write about an investment philosophy that I’m particularly fond of: investing in what you know.

If you’ve never heard of it, here’s a quick primer: the idea is to start looking at companies that you already know something about. Your hobbies and your job are good places to start. If you like to run, then Nike or Adidas would be natural places to start looking. If you’re an into electronics, then Sony, Apple, and companies like that make sense. The idea is that, you know and love this stuff already, so doing the research that comes with being a responsible investor will come easier to you.

The idea was started by Peter Lynch, whose book One Up On Wall Street, I reviewed a while back.

So today I’m going to tell you how I found certain companies that I now keep track of and have added to my stock “watch list.”

What do you know/love?

I’m a fan of video games. I don’t play them as much as you would think, but I love reading game reviews, industry news, etc. Yesterday I wrote about a deal on a game I want and I think that got me into the whole “invest in what you know” mood. Hence today’s post. But how do you go from “knowing” about something, to putting that knowledge to use in the real world of stocks? Well, here is a quick and dirty look at how I have done it with what I “know,” which in this case is video games.

1. I really enjoying reading about the video game industry. Reviews, previews, feature stories on how the creators came up with said game, etc. I love all that stuff. It’s weird because I don’t actually play that much, but I’m still into reading about it. One of the things the “experts” tell you to do when you’re thinking about investing in a specific stock is to submerge yourself in the “literature.” Typically, that means annual reports, financial statements, etc. Well guess what, this counts and it’s not nearly as boring.

2. I know that blockbuster games mean blockbuster sales, which usually mean a video-game stock will go up*. I’m talking specific video-game companies, not conglomerates that make all kinds of other things like Sony. I learned this lesson the hard way when I traded my first stock. Banking on the success of the soon-to-be-released PS2, I bought a couple of shares, not caring to notice that video games are only a sliver of the business that Sony does. But anyway, if a company releases a particular game and it sells well, they make money. It’s a very straightforward business in that sense—you sell well, you do well. Anyone can understand that,

3. Video-game reviews are unique in a couple of ways that offer a huge advantage to potential investors. Reading video-game reviews and (more importantly) previews can give you a sneak peak as to how well this game is going to do. Of course, that doesn’t always happen—look at Zack and Wiki (the name didn’t help). You do have to be a little familiar with each site/magazine and how they review games, how reliable they are, etc. For example, Gamespot and IGN are great places to get the inside scoop on games. GamePro? Not so much. And since I already do this (because for whatever reason, it’s fun for me), then this isn’t added work or “research,” it’s just looking at things a little differently. Knowing in advance how good (or bad) a game is shaping up is a huge advantage as an investor. With some games, the buzz and over-the-top previews tell you pretty clearly that this game is going to be huge (Metal Gear Solid 4 and Grand Theft Auto IV are great examples). This is a unique advantage to video games that is pretty unique and makes stock picking fun.

This actually mixes a little bit of Warren Buffett’s philosophy, which is “invest only in companies you understand.” I understand the way video-game companies work and make a profit, which you should make sure you understand too before using real money.

So Which Companies Did I Find?

Lately I’ve been paying tons of attention to this whole process because the video-game industry as a whole has been weathering this recession/slowdown very well. The reason? Huge, hit games. That and (according to some) when times are tough people tend to stay home more and seek out some form of escapism—video games are one way of doing that. Anyway, onto the stocks:

• Gamestop (GME): Not Gamespot, this is the store you’ll find at practically every mall out there. They sell video games and all video-game related accessories. If you see a huge line outside one of these, it’s probably a new Wii shipment or a blockbuster game that’s coming out. They also sell used games on the cheap.

• Electronic Arts (ERTS): You know them—they make Madden and a whole host of other sports games. If you play sports games at all (sports gamers are a HUGE reason behind the success of the video game industry as a whole), then you’ve played an EA game.

• Take-Two (TTWO): They are behind the monster hit Grand Theft Auto IV, and a whole bunch of sports games (the only competition to EA, basically).

• Konami (KNM): Metal Gear Solid 4, anyone? Another HUGE game. They also make Pro Evolution Soccer, which is the game I wrote about yesterday.

These are NOT recommendations. I’m just showing you the companies that I discovered by following what I already know and digging a little further. My advice to you is to go through the things you already know and love, and try to see them again for the first time. Which companies keep showing up? Are they public? If you aren’t sure how to find out, run a quick Wikipedia search and it should be able to tell you if they are a subsidiary and if they’re public or not.

The Next Step

Keep in mind this is only the beginning. Investing in what you know doesn’t mean that you should just throw your money at these stocks because you “know” them. Now you have to do a little bit of research and step outside your comfort zone. That’s the investy part of it, and many people are intimidated by it. I’ll post more on this another day, but rest assured that stopping here and buying stock based only on what you’ve done up to this point is NOT a good idea.

I’d love to hear if anyone else has found potential companies to invest in this way. Do share!

*This is a gross oversimplification, but I’ve found that it’s usually true with the really big blockbuster games.

Tags: gamespot, gamestop, grand theft auto IV, IGN, Invest in what you know, metal gear solid 4, One Up On Wall Street, Peter Lynch, pro evolution soccer, video games